Ford Due for Ratings Boost as Profit Returns to 1999 Level

Ford Motor Co.’s profit topped $7 billion in 2013 just as it did back in 1999 amid surging demand for Explorer sport-utility vehicles and F-150 pickups. Yet five years into its recovery, Ford’s credit ratings remain one level above junk — six notches lower than they were back in the SUV boom of 1999.

Ford’s credit profile is as good or better than it was 15 years ago, according to Joel Levington, a Bloomberg Intelligence analyst. Even so, the second-largest U.S. automaker is viewed as riskier than many global competitors, such as Honda Motor Co. and Nissan Motor Co. Standard & Poor’s Ratings Services now rates Ford the same as General Motors Co., which it elevated yesterday to the lowest investment grade level.

“If I was Ford or one of their bondholders, I’d be scratching my head,” Levington said in an interview.

Compared with 1999, Ford’s market capitalization is larger, its dividend costs lower, and the carmaker said it will cut automotive debt to $10 billion as soon as next year, equaling its obligations of a decade and a half ago.

The company’s prospects are poised to improve even more. Next year, after Ford introduces an aluminum-bodied version of its top-selling F-150, analysts predict a 72 percent rise in operating earnings and a 74 percent increase in cash flow, Levington said. That would make Ford’s operating profit margins equal to or better than higher-rated Honda and Nissan, giving ratings companies even more cause to boost Ford’s credit rating.

“Next year could really be a game-changing year from a credit standpoint for Ford,” Levington said.

“They’re performing very well, they’ll probably get upgraded,” said Mikelic, who holds Ford asset-backed securities and has gone in and out of its bonds. “Even when they were high yield, everyone realized they were rising stars in their debt.”

Mark Fields, Ford’s chief executive officer, will meet with investors Sept. 29 in Dearborn, Michigan, to update them on the company’s progress in meeting goals to sell 8 million cars and trucks globally, up from 6.3 million last year, and boost global automotive operating margins to 8 percent or 9 percent, from 5.4 percent last year. It will be the first big meeting with investors for Fields, 53, since taking over July 1 for Alan Mulally, 68, who was credited with saving the company.

When Mulally arrived at Ford in 2006, the company’s credit ratings had already fallen to non-investment grade, or junk bond, status as fuel prices soared and SUV sales plunged. He pledged all of the company’s major assets — including Ford’s blue oval logo — to get $23 billion in loans that year. That let Ford avoid the bankruptcies and bailouts that befell the predecessors of GM and Chrysler Group LLC. It also loaded Ford’s balance sheet with $34 billion in debt.

Investment Grade

Mulally used the money to overhaul Ford’s product line with fuel-efficient and profitable models, while shedding money- losing luxury brands and methodically cleaning up the balance sheet.

Two years ago, Ford recovered its investment-grade credit ratings — and control of its logo — as Fitch Ratings and Moody’s Investors Service upgraded the company to one level above junk. Standard & Poor’s followed in September 2013, lifting Ford to BBB-, its lowest investment-grade rating. Back in 1999, S&P rated Ford A, five steps higher, while Moody’s assigned it A1, six levels higher, and Fitch gave an A+, six steps up.

Credit ratings are a measure of a company’s health and can reduce the cost to borrow money as ratings are upgraded.

Industry Scrutiny

While the rating companies acknowledge Ford has made vast improvements, they also became harder graders after the worst recession since the Great Depression dragged U.S. auto sales in 2009 to their lowest level in almost three decades.

“It’s hard to say that Ford is not better positioned as a business now than in ’99,” Nishit Madlani, an auto analyst for S&P, said in an interview. “We tend to be more conservative than we were in the past given that we’ve seen the downside now.”

The entire auto sector receives greater scrutiny and now is measured against worst-case scenarios, said Steve Brown, auto analyst for Fitch.

“We’ve seen how quickly things can change,” Brown said in an interview. “We’ve seen that it doesn’t take a whole lot for a company that looks like it’s in relatively good shape to suddenly start burning a lot of cash.”

Ford, which declined to comment for this story, has particular problems that keep its ratings below peers such as Honda, Nissan, Volkswagen AG and Toyota Motor Corp., he said.

Less Diversified

The second-largest U.S. automaker remains too “North American-centric,” deriving the bulk of profits from its home market, Brown said. Ford posted pretax auto profits in North America of $3.94 billion in the first half of this year, while losing $458 million in the rest of the world.

“One of the potential triggers for an upgrade is looking for increased global diversification of their business,” Brown said.

Profits from other regions will help Ford show it can weather a downturn in the U.S., which would justify a higher rating, S&P’s Madlani said.

And Ford still relies too heavily on trucks and SUVs for its profits, Brown said.

Ford also must demonstrate that the aluminum-bodied F-150, its best-selling and most profitable product, can be manufactured at full speed with high quality and that it’s embraced by truck buyers before Moody’s will will commit to a ratings change, said Bruce Clark, the company’s auto analyst.

‘All-American’

“The F-150 is their first-team, All-American quarterback and you have to know that quarterback is going to be performing,” Clark said in an interview.

Ford begins building the new F-150 at a factory in Michigan next month and it will arrive in showrooms by year’s end. The truck will be 700 pounds lighter than its predecessor, mostly by using aluminum instead of steel in its body. Ford said that will make the truck its most fuel-efficient F-150 ever. In 2013, U.S. F-Series sales rose 18 percent to 763,402, making it the top selling vehicle line in America for the 32nd straight year.

While Madlani sees Ford making progress restructuring its operations in Europe, where it lost $1.6 billion last year, and the company earned a record Asia Pacific profits in the first half, South America losses increased 12-fold during the period.

“To the extent we get more confidence that this restructuring appears on track and they seem to be less of a risk than a year ago, there’s nothing that stops us from revising the outlook to positive,” often associated with an upgrade, Madlani said. “It could be any time this year. It could be next year.”

Ford Motor Co.'s profit topped $7 billion in 2013 just as it did back in 1999 amid surging demand for Explorer sport-utility vehicles and F-150 pickups. Yet five years into its recovery, Ford's credit ratings remain one level above junk - six notches lower than they were...